£1.4 Million VAT Rebate had Force of Contract Tribunal Rules


In a galling decision for HM Revenue and Customs (HMRC), an employment agency which was granted a VAT rebate of almost £1.4 million – allegedly in error – can keep hold of the cash after a tribunal ruled that it was paid under a binding contract.

The agency, which specialised in finding work for dental nurses, claimed exemption from VAT and sought reimbursement of tax paid from the inception of VAT in 1973. HMRC accepted that the supplies made by the agency were exempt and, under the terms of a compromise agreement, issued a rebate totalling £1,371,529.

However, it had since been established definitively that, as a matter of law, the exemption should not have been granted and HMRC claimed back the money. HMRC’s arguments were, however, rejected by the First-tier Tribunal, which found that the agreement had the force of contract.

In challenging that decision before the Upper Tribunal (UT), HMRC argued that no binding agreement had been reached. It was also submitted that HMRC was barred from entering into the agreement by Section 80 of the Value Added Tax Act 1994 and that the agreement was in any event void as it fell outside HMRC’s powers.

In dismissing the appeal, however, the UT found that there was nothing unlawful about the agreement. HMRC could not maintain that it had acted irrationally or that the agreement achieved an improper purpose. HMRC’s submission that it could not lawfully settle a case where it had no liability, if correct, would enable almost any agreement between HMRC and a taxpayer to be re-opened, regardless of whether such an agreement was reasonable when it was made.

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